Should Netflix, Inc. Be Worth More Than Walt Disney Co?

Wait to buy Netflix stock

Netflix, Inc. (NASDAQ:NFLX) has surged this year. Despite the S&P 500 stumbling around for much of the past month, the streaming giant is significantly higher. So far in 2018, Netflix stock is up almost 50%.

I’m not trying to play the skeptic card here — hey, I love my Netflix! — but what has happened to make NFLX stock go from a company worth ~$82 billion to more than $130 billion in eight weeks?

I don’t know that really anything has changed. At least that much.

The company’s most recent earnings result in January shed light on its ongoing advances to dominate the globe. Of course, both domestic and international subscriber results beat analyst expectations. That’s really no surprise, as Netflix has plenty of momentum right now. We already know Netflix is changing the game; it’s not like investors just woke up to the idea this year.

So if I had to pinpoint a reason for the massive move, this would my thesis: Last quarter showed strong user growth, indicating that the company’s most recent price hike for domestic users did not hurt its growth. Additionally, the increase helps its financials.

This told investors that analyst estimates were likely too low going forward, both for subscriber numbers and its revenue. Further, it shows that Netflix has pricing power moving forward.

Netflix Stock vs Disney

One comparison worth looking at is Netflix stock vs Walt Disney Co (NYSE:DIS) stock. NFLX stock now sports a $131 billion market cap to Disney’s $154 billion market cap. In other words, Netflix is already 85% the size of Disney and still growing at a rapid pace.

It’s pretty simple. Netflix has more growth and a game-changer dynamic to its business model. It’s hard to deny that. But Disney is no slouch either. With cable programming, hit after hit in theaters — Black Panther, Star Wars, Frozen, etc. — and a robust theme park and hospitality division, Disney is a formidable company as well.

While the growth outlook for Netflix crushes that of Disney (hence the premium for the former and the discount for the latter), the financials aren’t even a comparison. Over the last 12 months, DIS has free-cash flow (FCF) of more than $9.5 billion. FCF for NFLX is a deficit of nearly $2 billion — and remember, their market caps are almost the same.

With Netflix planning to spend about $8 billion in content this year, that gap cash flow gap is going to widen by a significant margin. Keep in mind that analysts only expect Netflix to generate $15.8 billion in revenue this year. So more than half of that will fall into content costs, not including other SG&A expenses. The valuations are as lopsided as the cash flow comparisons too.

The Bottom Line in NFLX Stock

I’m not saying NFLX stock is a terrible company. In fact, quite the opposite.

It has created a sticky platform at a price point almost any consumer can justify. CEO Reed Hastings has done a tremendous job transitioning from a mail-in model to on-demand streaming. Netflix is the undisputed leader in the cord-cutting trend.

However, I am reminding investors that the “old guys” in the space aren’t dying either. Sure, Disney has some issues with its ESPN unit and cord-cutting isn’t great for the company. But consumers like their movies and like going to Disneyland. They want their Elsa costumes, stuffed animals and Lego Death Stars.

Do you buy both DIS stock and Netflix stock?

It’s hard to be a buyer of the latter right now, given its near 50% run over the past two months. I think investors can buy Disney stock here with confidence that it will do well over the next few years, however. Plus its valuation is pretty reasonable.

Let’s look at the chart for NFLX:

Netflix stock is trying pretty hard to hit $300. Will it? All it needs is a little cooperation from the broader market and it’s certainly possible.

If the stock pulls back to $250 and holds though, investors with a high risk tolerance may want to consider buying NFLX stock.